UBS sees limited Bradesco, Ita+¦ exposure to Brazil's EBX woes
* Exposure may be 'underestimated' due to weak disclosure
* Bradesco appears most exposed to EBX woes, report notes
SAO PAULO, July 5 (Reuters) - The loan exposure of Brazil's largest banks to billionaire Eike Batista's debt-laden Grupo EBX is "limited," with potential credit-related losses weighing down earnings for a quarter or two in the worst-case scenario, analysts at UBS Securities said on Friday.
Collateral put forth by Batista and EBX, a mining, energy and logistics conglomerate, could be enough to reduce losses at the banks, London-based strategist Philip Finch said in a note on Friday. Banks are unlikely to set aside a significant amount of earnings in the form of provisions, or write off the value of loans to EBX in a meaningful way for the second quarter.
According to Finch, "most of the loans and financing are backed by guarantees, both cash as well as stocks of X companies," as EBX's listed companies are known among investors in Brazil. "We recognize the recent devaluation of X companies' stock prices, but still, banks could be able to execute the cash guarantees."
Most EBX Group shares are now almost worthless and debt trades at levels suggesting default, leading investors to question Batista's promise to invest more and fanning concern over the standing of creditors and banks. This week, Bank of America Merrill Lynch estimated that loan exposure to Batista's Grupo EBX conglomerate was at $4.2 billion and concentrated in five large Brazilian banks.
While UBS estimates loan exposure to EBX among Brazil's top-three private sector banks at about 2.2 billion reais ($973 million), the number may be "underestimated" due to the difficulty of knowing how much of that exposure is collateralized. Investors are balking at EBX's complex structure, its appetite for debt and, in the case of banks, the existence of guarantees and undrawn, committed credit lines.
Itaú Unibanco Holding SA, Banco Bradesco SA and Banco Santander Brasil SA are the country's largest private-sector banks, respectively.
For years, Batista put shares of some of the companies he controls through EBX as collateral in exchange for loans that he used to build oil platforms, develop wells, build ports and mine for iron ore. In recent months, Batista has reversed course and is currently selling assets and repaying debt to reduce requirements on some of that collateral.
At the end of the first quarter, Batista's six publicly traded companies had a combined net debt of about 18 billion reais, according to Thomson Reuters data. That number, which almost tripled since 2010, only rose as the companies posted losses exceeding 1 billion reais last year.
"Among the banks under our coverage, we think Bradesco is the most exposed bank to 'X' companies and with a higher potential of earnings downside," the note said.
According to UBS, Bradesco had disbursed 1.01 billion reais, and Itaú a total 1.01 billion reais, as of the end of the first quarter. This represents 1.4 percent and 1.5 percent of their regulatory capital, respectively.
For Santander Brasil, UBS estimated 253 million reais worth of loan exposure to EBX, representing 0.4 percent of equity.
If any of the group's companies or EBX as a whole were to restructure their debt, EBX-related provisions at Bradesco would jump to 39 percent of the year's estimated total, while for Itaú they would jump to 24 percent. In the case of Santander Brasil, that ratio would be 13.5 percent.
In the worst-case scenario, Bradesco could see net income down as much as 40 percent, the note said. Banks could use excess provisions they have booked on their balance sheets to absorb an eventual loss and limit an impact on profit, UBS said.
Any increase in provisions is more likely to take place in the third quarter, Finch and his team added.
($1 = 2.26 Brazilian reais)
(Reporting by Guillermo Parra-Bernal; editing by Jim Marshall)